As Mexico’s economy recovers, the country remains a big market for U.S. dairy products

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Mexico has long been the U.S. dairy industry’s largest export market. Dairy, particularly cheese, is a staple of the Mexican diet, but the country, which is covered primarily by deserts and mountains, has not been able to grow milk production fast enough to meet its growing domestic demand for dairy products, notes Monica Ganley, an analyst for the Daily Dairy Report and principal of Quarterra, a consulting firm in Buenos Aries.

“Even with the immense challenges of the past 18 months, Mexico continues to offer a compelling opportunity for U.S. dairy exporters,” Ganley said. “However, the pandemic deeply affected the Mexican economy, and the ailing tourism sector had a particularly profound impact on the country’s economy, which slowed U.S. dairy exports to Mexico at least temporarily.”

According to the International Monetary Fund, Mexico’s gross domestic product contracted an estimated 8.3 percent in 2020, and the Central Bank of Mexico’s periodic survey of financial analysts puts this year’s GDP growth rate at only 6.1 percent, meaning Mexico likely will not return to pre-pandemic economic activity until 2022 or later.

Similar to much of the world, Mexico is experiencing its third wave of the coronavirus pandemic as the country continues to methodically vaccinate its people. As of early August, 30 percent of the country’s population had received at least one dose of a COVID vaccine.      

“Despite the overarching economic challenges of the last year and a half, Mexican dairy demand has continued to grow, albeit modestly,” Ganley said.  “Looking forward, as Mexico emerges from the worst grips of the pandemic, dairy consumption appears poised to accelerate.”

According to a recent USDA report, Mexican dairy consumption rose to an estimated 12.947 million metric tons in 2020, an increase of 0.5 percent after accounting for leap day. Demand for manufactured products, such as cheese and butter, drove the overall increase, while in-home fluid consumption slipped 1.3 percent, likely due to the economic challenges faced by lower-income households, according to Ganley. This year, USDA expects dairy consumption in Mexico to expand another 1.1 percent.

“Economic recovery and a rebound in the hospitality sector are expected to drive increased demand for both fluid milk and manufactured products such as cheese, butter, and milk powders,” she said. “But global inflation of commodity prices, including dairy commodities, could undermine the purchasing power of the country’s most economically vulnerable individuals.”

In recent years, Mexico’s milk production has expanded steadily. Production in 2020 rose 2.3 percent to more than 5.5 billion pounds, and in the first half of 2021, output led prior-year levels by 2.4 percent. Mexican dairy producers added an estimated 50,000 cows last year and are expected to add another 50,000 this year, bringing the national herd to 6.6 million head, according to USDA.

“Despite the impressive trajectory of Mexico’s milk production, the industry continues to face challenges. Many farms are small and cannot capitalize on economies of scale, and the rapid appreciation of feed prices this year has created significant margin pressure for Mexican producers,” Ganley said. “Many rely on concentrates imported from the United States.”

In the first five months of this year, Mexico imported 501.8 million pounds of U.S. dairy products. While that represents a 12.8 percent increase compared to last year’s pandemic-influenced imports, it is still less than in the comparable periods in 2018 and 2019, when imports reached 562 million and 536.5 million pounds, respectively, according to USDA data.

“Mexico cannot yet fulfill its dairy demand through domestic production alone and as such will likely continue to look to the United States to fill the gap,” she added. “Geographic proximity and favorable trade relationships will continue to provide the United States a big advantage in the Mexican market.”

Source: dairyherd.com

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